A blog by Eapen Thampy

A quick bleg on the income tax and fraud

I argue that Missouri’s ‘Fair tax’ proposal to eliminate the income tax and implement a revenue-neutral, broad-based sales tax makes intuitive sense to me on the grounds that it is relatively more idiotproof. That is, sales taxes are relatively easy to implement and monitor and a lot less costly to enforce relative to income taxes. Sales taxes also are hard to get out of paying relative to income taxes; you don’t lose money when people forget to send them in (or they get lost in the mail), cheat on them, or make mistakes.

Speaking of cheating on your taxes, here is a rather egregious story of tax fraud from CNN today:

Investigators say Monroe County jail inmates in Key West had been filing false tax return forms for jobs they never had as far back as 2004, and getting thousands of dollars a pop in refund checks.

Using a formula that kept their refunds to amounts under $5,000 per claim, inmates thought they would fly under the radar, investigators say. And they did for years, passing around cheat sheets that showed line by line how to fill out the complicated forms.

The scam however is not a local gig. Investigators and federal officials say it has been going on for decades in state and federal prisons around the country.

“These guys weren’t rocket scientists…They didn’t just wake up and come up with this great scheme,” Monroe County Sheriff Bob Peryam said.

Here’s how it allegedly worked: using names of defunct or made up businesses as places of work and a master cheat sheet for salary and other numerical information, inmates filled out 4852 tax forms — the ones you use if your employer didn’t provide you with a W-2.

The inmates sent the forms in and the IRS then issued refund checks, in some cases sending them directly to the county jail. But inmates didn’t just fill out the forms for themselves. For a $500 fee ringleaders at the prison filled out refund requests for other inmates, promising they would each get a return of about $4,500.

Some of the prisoners, homeless before their arrests, were unaware of the scam. They gave away their social security numbers for honeybuns, a sweet pastry that inmates can buy in prison. The scammers would then file more refund requests under those social security numbers.

Wow. Consider that without an income tax, this scenario is simply impossible.

I want to point out that I don’t have a philosophical objection to income taxes per se. Rather it seems to me a matter of pragmatism: how idiot-proof can we make our taxation and government mechanisms?